Predicting another delay and higher costs at Pascua-Lama

Predicting delays and higher costs at Barrick's Pascua-Lama project

The bad news from Barrick Gold Corp.’s Pascua-Lama project seems to be without end. Following a court-ordered suspension of the Chilean portion of the project on Wednesday, analysts are bracing for even more delays and higher costs.

Pascua-Lama is currently supposed to enter production in 2014. But don’t count on it, according to TD Securities analyst Greg Barnes. He now assumes a 12-month delay, with first production in 2016, along with an additional US$1-billion in capital costs. Pascua is already expected to cost US$8.5-billion without any further inflation.

Mr. Barnes does not think Barrick is even considering a cancellation of Pascus-Lama, as the project is very important to the company’s long-term future. But if it did, he wrote that there would be a “significantly positive impact” on the company’s balance sheet over the next few years, which is a major concern for investors.

“With free cash flow delayed by another year in our model and the company’s balance sheet remaining constrained, we see little chance for the share price to outperform its peers,” Mr. Barnes wrote. He downgraded the stock to hold (from buy) and slashed his price target 20.5% to US$31 a share.

Analyst Stephen Walker of RBC Capital Markets is a little more optimistic. He sees the Pascua-Lama start-up being delayed four months to early 2015. But he cut his price target on Barrick shares to US$32 (from US$37) given the uncertainty, and boosted the expected capital cost of the project to US$8.75-billion.

Mr. Walker also outlined a “downside scenario” where the stock falls to just US$21. Under that assumption, Pascua is delayed until 2016 and the capital cost rises to US$10-billion. His “upside scenario” of US$36 assumes that the Pascua issues are resolved and performance is improved at Barrick’s Goldstrike and Cortez operations.

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